Danby Bloch: What does new dividend tax mean for your clients?

The new tax on dividends announced by George Osborne in the Budget will have a profound impact on savings and investment. It is also likely to cause a good deal of confusion. There will be winners and losers, and changes to what is and is not tax-efficient planning.

The basic facts are that, from 6 April 2016, the tax credit on dividends will be abolished. There will be a tax-free dividend allowance of £5,000 and dividends will be taxed at special rates according to whether the income falls into the investor’s basic, higher or additional rate bands.

Currently, the tax is charged on a dividend plus its accompanying tax credit. The total dividend plus tax credit is calculated by dividing the dividend payment received by 0.9. So a dividend payment of £900 is a dividend plus tax credit of £1,000 (£900 divided by 0.9) – i.e. £900 plus a tax credit of £100. The tax credit will be no more after 5 April 2016.

If you receive a dividend in the current tax year and you are a higher rate taxpayer, you pay a special rate of tax of 22.5 per cent on the dividend plus the tax credit, and you are deemed to have paid an extra 10 per cent in the form of the tax credit. So, on a dividend of £900 plus £100 tax credit, the higher rate tax charge in 2015/16 is £225.

From the next tax year, a dividend payment will be taxable on its own, without the extra tax credit, and the new tax rates will reflect this. As at present, dividends will form the top segment of a taxpayer’s income. The rate will depend on the extent to which this top slice of income comes into a particular tax band.

Non-taxpayers

A non-taxpayer currently pays no tax on a dividend and this will continue. The big innovation will be that many people who previously paid tax on dividends will not from next April because of the new £5,000 tax-free dividend allowance. This is because the first £5,000 of an investor’s dividends will be tax-free.

Basic rate taxpayers

Basic rate taxpayers currently pay no tax on a dividend. From April 2016, for dividends above the new allowance, they will pay a tax rate of 7.5 per cent on any dividend received – i.e. £67.50 on a £900 dividend payment. So, any basic rate taxpayer with dividends of more than £5,000 will be a bit worse off.

Higher rate taxpayers

A higher rate taxpayer, who normally pays 40 per cent tax on savings income or earnings, currently pays 22.5 per cent tax on the dividend plus tax credit – i.e. £225 on the £1,000. This is equivalent to 25 per cent of the £900 dividend payment excluding the tax credit. From 6 April 2016, for dividends above the new allowance, this investor will pay 25 per cent plus an additional 7.5 per cent dividend tax on a dividend payment – i.e. a total rate of 32.5 per cent. So, on the £900 dividend received, the dividend tax will be £292.50. Higher rate taxpayers have not received tax-free dividends until now. Next year they will only be worse off to the extent their dividends exceed £21,667.

Additional rate taxpayers

An additional rate taxpayer pays 45 per cent tax on interest and earnings. The current rate of tax on a dividend plus tax credit is 27.5 per cent – equivalent to 30.6 per cent on the dividend payment without the tax credit. Next year there will be an extra 7.5 per cent added to this, making the total new tax rate on dividends 38.1 per cent. On the £900 dividend, the tax payment will be £342.90. They have also missed out on tax-free dividends and the £5,000 tax-free allowance will mean their dividends will not suffer more tax until they amount to at least £25,370.

The tax rates on dividends plus tax credit are sometimes quoted to include the 10 per cent tax credit and sometimes not. The Chancellor expects to make an extra £2bn tax from this ploy. It will be interesting to see who ends up paying.

Planning strategies

In planning terms, the strategies are pretty clear for the most part.

Make sure spouses and civil partners are each in a position to make use of their £5,000 dividend allowances by balancing out enough of their investments to ensure this happens.

Corporate business owners should make sure shares are in the right hands and try to boost dividend payments this year before the tax goes up. Even then it will generally be better to draw dividends than salary/bonuses to save National Insurance contributions.

Be on the lookout for quoted companies to pay special divid-ends this year and bring forward any dividends that may otherwise have been payable early in 2016/17.

Recommended

“We believe the pension tax relief system will be fair and affordable and we will not propose any further changes to the system during the next Parliament.” This was the pledge made by the Conservatives in the run-up to the election, having already decided to cut the lifetime allowance from £1.25m to £1m next April […]

We have been studying the retail investment industry for more than a decade and, in that time, the changes have been immense. Summer is a good time to reflect, so allow me to take a look at the recent trends that point towards more muscular competition for everyone. Three themes in particular underscore how the […]

Work and Pensions select committee chair Frank Field has condemned the Government’s response to its report on automatic enrolment. In March the committee, then chaired by Dame Anne Begg, issued a raft of recommendations following a review of auto-enrolment and the broader pension reforms. Begg’s committee called for an increase in the age at which […]

National wealth manager Bellpenny has acquired Croydon advisory business Trustee Asset Management for an undisclosed fee. The deal boosts Bellpenny’s funds under management by £157m and takes the consolidator’s number of acquisitions to 30 since it launched. TAM shareholders and advisers Bob Bradley and Nick Bird will join Bellpenny following the completion of the deal. […]

By Kunal Desai, Manager of Neptune India Fund Kunal Desai recently celebrated his third anniversary as manager of the Neptune India Fund. Kunal has built a strong track record of outperformance since he assumed responsibility for the Fund, delivering a return of 30.3 per cent compared to the MSCI India Index gain of just 14.0 […]

Newsletter

Latest from Money Marketing

The following sorry verse embodies procrastination on a whole new level: “Hello there, my name’s Phil; I rap like a small bear writing a will [diligently]; Estate-planning, ninja-whooping IHT; Shame I’m not as bizzie [urban affectation] with the RLP.” These words were penned in response to my father’s short verse sent to me, after the […]

Ahead of speaking at Money Marketing Interactive in May, LEBC public policy director Kay Ingram talks about the importance of putting the client at the centre of the advice process and Have advisers reached a point of true professionalism yet? In the 38 years I have worked in our industry, IFAs have seen a monumental shift from […]

Professional indemnity insurance providers have acknowledged that they see DB pension transfers as a high-risk area, as experts continue to express fears over the breadth of coverage for IFAs. While the FCA recently proposed measures to stop PI policies from excluding the Financial Services Compensation Scheme as a claimant and discussed the possibility of a […]

19th March 201812:45 pm

Comments

There are 2 comments at the moment, we would love to hear your opinion too.